Changing the numbers in the lottery game

17 September 1999

On the surface, the issue over the huay on-line or automatic lottery vending is whether glitzy foreign machines should be allowed to take away the livelihood of disabled lottery ticket vendors. But beyond that is a much bigger issue: who wins in the Thai lottery. How. Why. And should it be changed.

The Lottery Bureau has a lot of history to live down. Back in the bad old days, the dictator-generals found the Lottery Bureau was the easiest point to siphon cash out of government. When Field Marshal Sarit died, he was alleged to have stolen almost 3 billion baht, equivalent to nearly 1 percent of GDP at that time. Most of this was lifted from the lottery.

After that, things were cleaned up a bit. But not completely. In the 1980s there was another scandal when investigators tumbled some interesting features of the device which selected the winning numbers. Things were cleaned up again. The winning numbers are now selected in a bizarre mini-ritual which seems inspired by 1950s American game-shows.

This selection process now commands confidence. But the antique styling of the selection ritual is a give-away. The Lottery Bureau is a very old-fashioned business. And it has lots of old-fashioned business problems. A handful of wholesale agents are able to monopolise the entire ticket distribution system. They exact an extra 5 baht tax on each ticket. At most this extra levy yields them 16 million baht per month. The original idea for the huay on-line was to break this ring.

Do you think the campaign against the huay on-line comes from the disabled ticket vendors or these agents?

What else is going on behind the scenes? Many people found it curious that Pichet Phanvichartkul was converted from critic to defender of the huay online after he became deputy finance minister in charge of the Bureau. So curious in fact that over the last two weeks we saw two political ‘firsts’.

On the one hand, Pichet’s straightforwardness on this deal was openly questioned by several members of his own party. On the other, before the deal became beyond rescue, Pichet appeared on three TV talk-shows on three separate channels on the same evening.

But there is another and more important result of the old-fashioned inefficiency of the Lottery Bureau—the flourishing of the underground lottery which uses the same winning numbers.

Depending on which research you care to believe, the turnover of the underground lottery is three to eight times that of the official one. At the upper estimate, that means over 300 billion baht a year. The underground lottery is more popular than the official version for three main reasons. First, it allows people flexibility to play in very small or very big amounts—from one or two baht to hundreds of thousands—rather than the standard 40 baht ticket of the official lottery. Hence it has a much broader customer base, both at the top and bottom ends.

Second, it allows more involvement. Players can choose their own numbers and choose between different combinations and odds. Third, the underground lottery is sold through an immense network of nested pyramids involving millions of people reaching into every village and every office. This network has become so big because the system allows people at all levels to act as a small-scale lottery entrepreneur—taking bets from people below them in the pyramid, playing host for some of the potential risk and reward, and passing the remainder on up the chain.

In other words, the underground lottery flourishes because it has a much more dynamic, more involving, more customer-friendly, more demand-driven distribution system. The Lottery Bureau by contrast is a ticket printing facility which runs a 1950s-style game-show twice a month.

But who wins the underground lottery? According to the best estimate, some 60-70 percent of the total turnover is returned to the players as prizes, and 15-20 percent goes to the distribution network and the small-scale entrepreneurs. But it is what happens to the remainder which is interesting. Around 15-20 billion baht a year is channelled to some police and others in protection pay-offs needed to allow the system to continue.

Finally another 15-20 billion baht a year goes to the big underground lottery hosts. Roughly speaking there is one of these per province. That means each has an income of some 200-300 million baht per year. One of the ultimate destinations of this money flow is politics. Many big hosts have been MPs. Others have openly boasted of financing MPs. Besides the cash aspect, the underground lottery distribution network is a ready-made election campaign organisation. In other words, the underground lottery is one of the foundations of money politics.

So it is no use looking just at the huay on-line. We need to look at the lottery business as a whole. And it is not a pretty sight. On one side there is an old-fashioned organization with a murky past which probably makes space for various vested interest. On the other there is a dynamic underground lottery with a remarkable distribution system which fosters systematic police corruption and money politics.

Forget Bangchak. The lottery business is a much more prime candidate for privatisation. No amount of internal reform, no amount of investment in fancy machines, is going to do anything basic about the Lottery Bureau. No amount of policing is going to tame the underground lottery.

Privatisation can address problems in both sides of the business. It can sweep away the vested interests which inevitably swarm around bureaucratic bodies handling lots of money. It can bring the underground lottery under control by the only method likely to be effective—market competition. The idea is not new. Many other countries have privatised national lotteries in recent years. But the process is not simple. From the experience of these countries, a few learnings are available and worth noting.

First is a basic mental attitude: stop thinking you are going to control or eliminate the sort of mass gambling represented here by the lottery. Thais do not gamble any more than other nationalities. The percentage of people who gamble and the amounts they spend are surprisingly constant across cultures. The lottery in Thailand (official and underground) is very deeply entrenched. Other countries have found that it is impossible to eliminate police corruption until you come to terms with such mass gambling. Britain only managed to clean up its police force 30-50 years ago after government gave up trying to suppress horse-race betting.

Second, any change in the regulation of gambling should not be seen as a way to increase government revenue. Many people promote privatisation of the lottery or legalisation of casinos as a way for government to earn more revenue. But this is very dangerous thinking. Experience shows that nobody becomes more addicted to gambling than governments. Big international gambling companies know exactly how to get governments hooked. They get a little harmless concession and they pay the government a little tax. Then they ask for a bigger concession and offer a lot more tax revenue. For government it is just too easy. Before long, they are dependent on the gambling tax revenue. Many US and Australian state governments have got into this addiction and now regret it. So privatisation should not be designed to make lots of public revenue. And that revenue should not go into the main government budget, but should be managed by an independent board, and channelled to suitable social projects.

Third, the privatised lottery will need to be spruced up to compete with the underground version. But somehow government must draw the line between the lottery form of gambling and the slot-machine form. The lottery ticket is a discrete purchase with a delayed result. You buy a ticket and wait. The slot machine is instant and continuous. You put in one token and then you put in another one, and another one, and another one. There is an easy progression from the standard lottery, to a machine system like the huay on-line, then to the same thing with an instant win—which is little different to a slot machine. Companies like Jaco which sold the machines to the Bureau make their best money from slots and they are likely to want to push Thailand further down this road. But this must be resisted. The slot machine is the most effective system devised for taxing the poor since the collapse of the feudal system.

Fourth, any move towards privatisation must be absolutely transparent. It must have evident social benefits. It most in some way protect the livelihood of the disabled who have come to depend on this business.

Seize the moment. Accept that small-scale mass gambling exists. Privatise to solve the twin problems of the Bureau and the underground lottery. Avoid getting the government hooked on gambling. Avoid temptations to increase the tax on the poor.